What is unrelated diversification?

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What is unrelated diversification?

Unrelated diversification is where firms expand into areas that are unconnected with the other parts of the firm. They are often run by a completely separate division, sharing no resources with the other part of the business.

For example, a drinks firm that gets into furniture, or a hotel firm that decides to diversify into media. These are examples of unrelated diversification – no underlying basis for how the new areas are connected with the other parts of the business.

Key issues with unrelated diversification

The key issue with unrelated diversification is that such businesses are often poorly run – worse than if they were split up into separately run businesses.

Conglomerates – large diversified businesses, that often had many unrelated areas – were once common, however were seen to be poorly managed. Managers were spread too thin – trying to oversee completely different business areas. There were no resources shared between the business units, because they were each completely different. In effect, the management layer brought additional costs (often resulting in poorly managed divisions), with no benefits of having the different businesses units in one firm. 

How to recognize unrelated diversification

The key element of unrelated diversification is a lack of connection between the business units. If the divisions of the firm are in different product areas, with different customers, and don’t share the underlying resources of the company, then the diversification is unrelated.